A recent study by The Boston Consulting Group shows that Middle East banking revenues stagnate for the first time in 5 years. Overall Middle East banks are still less affected from the financial crisis than their international peers but international banks recover faster in 2010
Dubai, 18 October 2010 - According to a new study by The Boston Consulting Group (BCG), the banking industry in the Middle East shows further signs of recovery but at a reduced pace. 2010 banking revenues have stagnated with potentially only a minor increase at the end of 2010 in comparison to 2009. Profits decreased very slightly in the first half of 2010 but may recover during the course of the year, following the turnaround in 2009, a year earlier than the international benchmark. Loan loss provisions remain at a high level, above US$4 billion for the first half of 2010. International banks recovered faster in 2010 but still remain at a much lower revenue and profit index level than their Middle East counterparts.
Based on 2010 first half results reported by the banks, the new study is part of BCG’s biannual banking performance indices measuring the development of banking revenues (operating income) and profits for leading global banks.
In April 2009, BCG launched the first edition of the banking performance index in the Middle East, creating a customized index specifically for the regional banking markets, with 2005 revenues and profits as starting benchmarks. The index covers the largest banks in Bahrain, Kuwait, Qatar, Oman, Saudi Arabia and the UAE. “This year, the BCG index includes 34 banks from across the GCC and represents nearly 80% of the total regional banking sector”, said Dr. Reinhold Leichtfuss, Senior Partner & Managing Director in BCG's Dubai office and leader of BCG’s Financial Institutions practice in the Middle East.
Middle East banks' revenues stagnate for the first time
Banking Performance Indices: Middle East vs. International Banks
Banking revenues in the Middle East stagnated while international benchmarks recovered. Only 15 out of the 34 banks covered by the index grew their revenues from the first half of 2009 to the first half of 2010. For the first time, international banks’ revenues exceeded the 2006 level of BCG’s index, but remain significantly below the index level of the Middle Eastern banks.
Even though profits declined slightly during the first half of 2010 compared to 2009, we expect a positive development for year end results, assuming patterns continue to normalize following the downturn. Given that the crisis started in August 2008, 71% of profits in 2008 stemmed from the first half of the year. In 2009, this figure dropped to 58% and we forecast 2010 to be closer to a 50:50 distribution, which would lead to a slight growth in the index.
As expected, banks in the Middle East still had high provisions, but most banks in the region stayed well below the previous year’s level, which could also lead to the overall increase in profitability by the end of 2010. In contrast, UAE banks had to increase provisions by around 40% compared to the first half 2009.
Amongst other trends, banks started to get operating costs under control, as they have been experiencing high revenue and profit pressure over the past few years. For Middle East banks overall, costs stayed flat and a number of banks even decreased their operating costs.
Banking performance differing by country
Middle East banks in total saw the highest stability in revenues, profits and loan loss provisions compared to the previous year’s first half, although the performances vary significantly by country and bank. While revenues and profits remained relatively stable for banks in Saudi Arabia and Kuwait, banks in the UAE and Oman experienced a decline in profits. Banks in Qatar and Bahrain further increased their profits.
Banking Performance Indices: Revenues, Profits and Loan Loss Provisions per country
Retail revenues and profits decline in the first half of 2010
After retail banking revenues reached their peak in 2006 and dropped in 2007, the GCC retail revenue index has grown at a small rate of 4%. In the same period, the profit index kept declining. The index development is to some extent driven by the weight of Saudi banks in the BCG retail banking sample of banks, with constant segment reporting from 2005 to 2009.
While retail revenues of Saudi Arabian banks have remained flat since 2005, banks in other Middle Eastern countries were able to generate double digit growth rates, led by the UAE banks with an annual growth of 21%. Since 2009, retail revenues throughout the region have returned to single digit growth, with the majority of countries experiencing a decline in the first half of 2010.
GCC retail profits are driven by the market size of Saudi banks which have been decreasing since 2006, while banks in the UAE, Qatar, Bahrain and Oman were able to increase their retail profit over the past 5 years. This trend continues in the first half of 2010 with strong profit growth in the UAE, Oman and especially Qatar.
Corporate revenues stagnate in the first half of 2010; corporate profits yet to recover after decline in 2009
The corporate segment experienced strong revenue growth of 15% annually over the past years with revenues doubling since 2005. However, in the first half of 2010, revenues stayed flat for the first time and profits are yet to recover following their significant decline in 2009.
Banking Performance Indices: Retail vs. Corporate Banking
Overall, the indices show that the core banking segments (retail and corporate) develop at a relatively stable rate in terms of revenues and profits; fluctuations are mostly caused by other income elements.
Excelling in a slow growth environment requires higher competitiveness
In times of strong growth and as seen in the Middle East over the past few years, virtually all banks have been able to steadily increase their revenues by simply expanding in line with market development. While the compound annual growth rate (CAGR) of retail revenues was over 25% in the Middle East from 2001 to 2006; it has declined to an average annual growth rate of below 4% between 2006 and 2009. Since 2008, the time of very strong growth is over in the region and even though the industry is recovering from the worst of the crisis, returning to pre-crisis development in the foreseeable future is unlikely.
This new market environment will lead to a significant increase in competition for the most attractive customer segments. In a slow growth environment banks are forced to build on their competitive strength, since growth will require banks to increase market share at the expense of others. Looking at the increasing divergence in the performance of individual banks within the BCG performance indices, it is clear that in a similar environment some banks are already prospering while others are losing ground. But what are these competitive advantages that are required to succeed?
While a number of banks have started cost reduction initiatives, simply reducing costs will not be sufficient to overcome the upcoming challenges over the next months and years. Banks in the region will need to increase their productivity, get their risks under control and focus on the right strategies and business models.
Leichtfuss commented: “Successful banks will need to have a differentiating strategy and value proposition. Moreover, consistency between vision, strategy, business model, organization and corporate culture is necessary to really make a difference. Offering everything to everyone will not be sufficient to succeed in the future. In retail banking this means either focusing on the mass market and being a cost leader with a critical mass of customers, or offering a superior value proposition and service excellence to attract high value customers. Trying to serve both segments at the same time as a market leader in both, will not be successful in the long run.”
In addition, banks need to focus on their existing customer base. Acquiring new customers is not as easy as it has been in the past and increasing the share of wallet from existing customers through cross selling is becoming essential. This also means increasing sales effectiveness in a decisive way. While most banks declare that they are pursuing this objective, only few reach the elevated heights of a truly lasting sales power that is higher than the market norm. The average product per customer ratio in the region is still well below international benchmarks.
In corporate banking we observe that banks with strengths in transaction banking and high fee income fared better through the crisis than those who were largely relying on credit.
As opportunities for organic growth in such a market environment are scarce, large players will look for alternatives for growth – be it abroad or through consolidation. This trend will accelerate again when the leading competitors have digested the impact of the crisis completely. This is a pattern that we have observed in many other mature markets, for example in the US and Europe during the mid 1990s and one that we anticipate seeing in the Middle East as well.
